USDOL Wage-Hour Division Final Rule on Independent Contractor Status Reverts to Pre-Trump Rule and Rejects “Core Factor” Test
January 24, 2024 | By: Patrick W. McGovern, Esq.
On January 9, 2024 the U.S. Department of Labor (DOL) released a final rule that will apply beginning March 11, 2024 in determining whether a worker can be classified as an independent contractor as opposed to an employee under the Fair Labor Standards Act (FLSA). The 2024 Rule modifies Wage and Hour Division regulations by adopting an analysis that the agency claims is more consistent with judicial precedent and the FLSA’s text and purpose than the final rule issued by the agency during the final days of the Trump Administration (2021 Rule).
Under the FLSA, independent contractors in business for themselves do not qualify for the minimum wage and overtime pay protections that apply to employees. Although the FLSA does not define the term independent contractor, since the 1940s, the DOL and the courts have applied the economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA -- the ultimate inquiry being whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and an employee) or is in business for himself (and an independent contractor). To assess economic dependence, the DOL and the courts have historically conducted a totality-of-the-circumstances analysis which considers six factors, with no single factor being dispositive or having more weight. The six factors considered include: (1) the worker’s opportunity for profit or loss; (2) the worker’s investments compared to the business’s investments; (3) permanency; (4) actual and reserved control by the business; (5) whether the work is an integral part of the business; and (6) the criticality and uniqueness of the worker’s skill and business initiative.
In January 2021, the USDOL under the Trump administration published the 2021 Rule entitled Independent Contractor Status Under the Fair Labor Standards Act. The 2021 Rule departed from the longstanding application of the economic reality test by, among other things, simplifying the analysis and identifying just five economic reality factors, and designating two factors as core factors.
Concerned that the 2021 Rule would result in the classification of more workers as independent contractors instead of employees and their loss of FLSA protections, on October 11, 2022 the Biden administration issued a notice of proposed rule-making outlining a more employee-friendly approach to determining independent contractor status, which generated approximately 55,400 comments. In its final rule the DOL concluded to rescind the 2021 Rule and return to a standard that is, on its face, more consistent with judicial precedent and the DOL’s longstanding guidance. However, the 2024 Rule leaves little doubt that the analysis of independent contractor status is now tilted in favor of a finding of employee status. The 2024 Rule adopts the six-factor economic reality test, and contains no safe harbor for classifying a worker as an independent contractor, and no real-life examples of independent contractor status. Along the way the 2024 Rule states that neither a temporary work relationship, the worker’s investment in tools and equipment to perform the job, nor the worker’s specialized skills indicate independent contractor status. On the other hand, the worker’s decision to work more hours to enhance income, the worker’s open-ended relationship with the business, and the worker’s performance of work that is critical, necessary or central to the business all indicate that the worker is an employee. The 2024 rule also discusses how scheduling, remote supervision, price setting, and the ability to work for multiple businesses enter into the analysis of who controls the worker’s workday. Unlike the 2021 Rule, the DOL’s 2024 Rule provides no guidance as to what weight an employer and the enforcement agency should give to any factor. Further muddying the analysis is the Rule’s statement that additional factors may be relevant in the analysis, with no hint as to what these factors might be.
THE BOTTOM LINE
Clearly the DOL’s 2024 Rule will make it riskier for employers to justify classifying workers as independent contractors. The 2024 Rule forces employers to guess which factors should be emphasized and given the greatest weight in classifying the worker, and will likely result in more confusion and litigation because of the lack of practical guidance on who qualifies as an independent contractor. Congressional, business and industry group challengers such as the U.S. Chamber of Commerce may succeed in delaying the effective date of the 2024 Rule, or repealing it altogether. The House Committee on Small Business is urging the Department of Labor to reconsider the 2024 Rule, arguing that the Rule will disproportionately impact smaller businesses.